Tuesday, September 25, 2012

This is just a note to my readers that I added to my AMD position on August 31 and again earlier today. AMD is at or near multi-year lows.

I believe the situation is not as dire as the shorts think. Even mediocre Q3 results, which are scheduled to be reported on October 18, could force the shorts out and the stock price up. AMD is executing well, with new GPUs about to be announced and with desktop Trinity APUs due for release on October 2.

The pros and cons of AMD have been raked over by myself [See my AMD analysis page] and many others. A good summary of the buy arguments for AMD is CFO Resignation Irrelevant, Buy AMD by Ashraf Eassa, with lots of comments reminding us of the cons of buying AMD even at this super-low price.

Disclaimer: I own AMD stock. I don't trade in volumes large enough to affect the stock price, so I am not putting any time restrictions on my trading activities due to this article.

Thursday, September 20, 2012

Silicon Graphics International (SGI) makes supercomputers. Its clients include government agencies, financial firms, the pharmaceutical industry, Web farms including cloud services, and an increasing number of business verticals. Just before I last wrote about SGI in February it had run into profitability issues [See SGI Challenged by Analysts]. SGI's stock price was at had declined rapidly from near $15.00 per share to under $10.00. Today SGI closed at $9.37. The 52 week low hit $5.02 on May 21st this year. Is SGI ramping its sales and margins, or is the price increase just a dead cat bounce?

SGI is on a fiscal year, but I'll refer to calendar quarters. For the December 2011 quarter revenues were $195.2 million, non-GAAP net income was just $1.3 million.

The March quarter, which is typically sequentially and seasonally lower in the supercomputer business, saw revenues of $199.4 million, with non-GAAP net income of $3.7 million. June quarter revenue was a dismal $179.5 million, with non-GAAP net income of negative $3 million.

So anyone long in the stock has a case to prove.

Market capitalization ended today at $303 million. Even at $180 million per quarter revenue is running $720 million per year. While higher revenues might be good, the real problem this last year has been margins.

Management has noted that their invoicing process for some computer systems had been SNAFU. As a result, they lost money on those individual systems. Sales people were making deals with insufficient supervision, resulting in great steals for the customers, but no profits for the firm. That practice should have ended by now, but because of the size of SGI deals and the lengthy delivery and revenue recognition processes for supercomputers, there will still be some of that low-margin revenue in the September quarter and maybe as late as the March 2013 quarter. In the June quarter SGI rejected several deals in that quarter because of insufficient margins.

Of course rejecting low-margin deals leads to lower revenues, unless the customers are not as price-sensitive as they pretend to be.

Generally, the business background situation is a cause for optimism. The increases in spending on cloud computing, scientific computing, security computing, and high-performance computing (HPC) have been steady and are likely to accelerate in the past few years.

The new SGI UV 2 supercomputer has received good reviews. SGI does not usually break out revenue by type of computer sold, though that would be helpful to the investment community.

The last guidance issued for the September quarter was for revenue between $180 and $195 million and non-GAAP net income in the vicinity of negative $6 million. The quarter is not over, and the macroeconomy has not been helpful.

I should point out that the old Rackable Systems, which bought the bankrupt old SGI to become the current SGI, also had the same margin issues. Management changes from time to time and new management always says they understand the issue and will deliver better margins in the future. Buying SGI stock right now is a bet that the current CEO, Jorge L. Titinger, who joined SGI on February 27, 2012, can break what seems to be an entrenched corporate culture of great engineering combined with disdain for a need to consistently generate solid profits.

The problem may, in part, be competition, in addition to the sad corporate culture. SGI competes with Dell, Cray, IBM, HP, Appro, Oracle and Fujitsu, among others.

Disclaimer: I am long SGI. I will not make any changes in my position for the next week.

Monday, September 10, 2012

Microchip (MCHP) is one of the largest global manufacturers of microcontrollers, which are semiconductor chips incorporating computers and capabilities to receive data from sensors and send control signals to motors or other external parts. For investors the company is noted for its relatively high dividend and its ability to generate profits even during down cycles.

Today Microchip stock closed at $34.14, against a 52 week high of $38.87 and low of $30.07. At that price MCHP market capitalization is $6.6 billion, and the dividend yield is 4.05%.

Last week Steve Sanghi, the CEO, reported that after a sequentially up calendar Q1 and Q2, the business environment weakened towards the end of Q2, with Europe particularly slow. The situation has not improved, so Microchip is now guiding revenues to be about flat in Q3 compared to Q2, excluding the increased revenue from the recent SMSC acquisition. [Note calendar Q2 was fiscal Q1]

The SMSC acquisition closed August 2, at a value of $946 million. For fiscal 2012 SMSC had sales of $412 million and a non-GAAP operating margin of 12%. It will fit well with Microchip's product line, as SMSC is a specialist in smart mixed signal connectivity. Its revenues are 43% from microcontrollers and 57% analog products. These are used for automotive entertainment, wireless audio, and USB and Ethernet. Sanghi believes Microchip will be able to increase gross and operating margins of the acquisition closer to its own, high-marin model.

Microchip sells to a very diverse set of customers, including manufacturers of automobiles, household appliances, and medical and industrial equipment. Microchip also has an advanced touch screen set of solutions.

SMSC will provide a boost about 3 cents per share in the first partial quarter, then 6 to 7 cents in the first full quarter, fiscal Q3.

Steve pointed out that when Microchip bought SST it had not made a profit in five years, but has had good margins once integrated. He sees SMSC as a much less difficult business to integrate and profit from.

There is plenty of competition for microcontroller chips, but Microchip now has over 7% of the market, compared to under 2% in 1994, with the market share climb being pretty steady. In 2011 Microchip was the 4th largest player in the market after Renesas, Freescale, and TI. It is second in the 8-bit segment to Renesas, which moved ahead only when it absorbed NEC.

For fiscal Q2 2013, ending September 30, 2012, revenues are now expected between $12 and $430 million and non-GAAP EPS is expected between $0.50 and $0.52.

Given the high dividend, relatively low volatility of the stock price, and further opportunity for growth, Microchip remains a good core technology investment for long term investors. The main risk I see is macroeconomic.

Disclaimer: I have been long MCHP since 2006. I will not trade in the stock for at least one week from today.

Thursday, September 6, 2012

Celgene (CELG) stock closed up $3.53 or 5% today to $74.49. This was not just from the general enthusiasm for the ECB plans to save the Euro, although a week Euro has been hurting Celgene's revenues and earnings as Europe is its second largest market after the United States. CELG's 52 week high was $80.42 on April 4 and the 52 week low was $56.79 on September 6, 2011.

When I last wrote about Celgene, on April 27, I said: "Celgene (CELG), a biopharmaceutical company therapy company, provides a double dose of growth potential: further revenue growth with its currently approved therapies and a rich pipeline with some therapies closing in on FDA approval and commercialization." See the whole article at Disappointed by Celgene's Q1?

Today Celgene announced that Phase III results from three studies. I believe those results were strong enough that Apremilast is likely to be approved for the treatment of psoriatic arthritis. Of course we won't know for sure until the final FDA vote, and even the actual submission to the FDA will not be made until Q1 2013. Apremilast is an inflammation modulator that could be usefull in other diseases caused by inflammation.

Given that Q2 numbers, reported back in late July, were pretty solid, I think that the focus will shift again to the potential value of Celgene's pipeline. Revenue was $1.37 billion, up 8% sequentially from $1.27 million and up 16% from $1.18 billion year-earlier. GAAP net income was $367.4 million, down 8% sequentially from $401.5 million but up 32% from $279.2 million year-earlier. EPS (earnings per share) were $0.82, down 9% sequentially from $0.90, but up 39% from $0.59 year-earlier.

Celgene raised its full year guidance for non-GAAP EPS to $4.80 to $4.85, up $0.05 from prior guidance.

Celgene has many therapies in its pipeline, from pre-clinical through Phases I, II, and III, but I can only cover a few specific examples that are likely to greatly increase the value of Celgene in the 2012 to 2015 timeframe. I'll focus on Abraxane and Pomalidomide, since I already covered the Apremilast news.

Abraxane is an improved formulation based on paclitaxel, which is already approved in the U.S. and Europe for breast cancer. It competes with generic paclitaxel. Revenues in Q1 were $104 million. It gave good data in trials for non-small cell lung cancer (NSCLC), and now has an application pending with the FDA, with decision due in October. In addition two Phase III trials are now fully enrolled with patients. One, in combination with gemcitabine is for pancreatic cancer, the other is for metastatic melanoma (skin cancer). Approval by the FDA would greatly increase the use of, and revenue from, Abraxane.

Pomalidomide data for relapsed and refractory multiple myeloma has been submitted to the FDA for marketing approval. It is also in a Phase III trial for myelofibrosis. Again, approval in either indication could eventually generate hundreds of millions in revenue.

Against the healthy growth in revenue from older therapies and the potential for new approvals, the current trailing price to earnings (P/E) ratio of 21.6 seems to fail to capture the train of future profits that appears to be coming down the track.

I don't see any substantial short-term down side risk for Celgene, other than normal market fluctuations. I see a number of new therapies that could be approved. If even one is approved the company would become significantly more valuable. If a number of them are approved there are going to be some really big numbers floating around for Celgene by 2015.

Tuesday, September 4, 2012

Hansen Medical Inc. (HNSN) manufactures catheter based medical robots. Its stock price is in a major slump right now, opening today at $1.48, versus a fifty-two week high of $4.46 on September 20, 2011 and near its 52 week low of $1.42. Is this a buying opportunity, or a stock to be avoided even at this price?

For several years Hansen has marketed its Sensei robot for electrophysiology procedures, which measures electrical activity inside the heart. Meanwhile it has developed its robotic catheter technology for use in vascular (blood vessel) surgery. Last year its Magellan vascular robotic catheter system was approved in Europe. Late in Q2 this year the FDA granted approval for commercial sales in the U.S. Given that Magellan is believed to have an addressable market roughly ten times the size of Sensei, you might think the bulls would be running with the anticipation of future profits.

Financial results for Q2 2011, reported on August 8, are the reason for the slump. I don't think anyone expected HNSN to get to profitability, since there was no time to sell Magellan robots in the U.S. in the quarter. But sales were the worst in company history. Only one Robotic Catheter System was shipped, a Sensei, but two had recognized revenue, including the one that was shipped and one shipped in a prior quarter. Revenue was $3.5 million, down 26% sequentially from $4.7 million and down 34% from $5.3 million in the year-earlier quarter.

Net income was negative $11.5 million, up sequentially from negative $11.8 million, but down from negative $8.8 million year-earlier. EPS (earnings per share) were negative $0.19, up sequentially from negative $0.20, but down from negative $0.16 year-earlier.

Management claimed that talks are underway with hospitals in the U.S. and Europe, with multiple quotes out. While understanding that these are expensive robots that have to go through a lengthy review process before hospitals buy them, you have to ask what happened in the past that the old Sensei system sales dropped to just one in the quarter.

The Sensei systems that are already installed are being used, as indicated by 637 known EP procedures performed with them in the quarter. To try to compensate for the dismal sales results, Hansen brought into the analyst conference call Professor Cheshire of St. Mary's in London, the first hospital to treat patients with the Magellan Robotic System. He spoke on his team's collective experience in peripheral vascular, aortic, and other vascular cases. They discovered a number of useful robotic catheter techniques as they progressed from simple to more complex cases. They can now treat difficult cases. The had prior experience with the De Vinci surgical robot made by Intuitive Surgical. Cheshire believes robotics differentiates St. Mary's from competitors. Studies there showed the advantages of the Magellan system and other minimally invasive techniques. The robot is bringing patients in already.

So you are making a bet buying the stock even at this price. Are the negotiations for sales of Sensei and Magellan going to come through, and are they going to grow long-term? If your crystal ball says yes, you should scoop up all the Hansen Medical stock you can afford.

I don't have a crystal ball and I already own Hansen stock. I believe the technology developed by the company would have a great deal of value for other medical device players. So there is some low point of market capitalization that should trigger that kind of event. Market capitalization today is just $90 million. If I had that kind of money, and could buy all the stock without bidding up the price, I would do it. Then I would assess the sales pipeline. Ff I did not like it I would try to sell the business or the intellectual property to St. Jude (STJ), Intuitive Surgical, or a similar player.

Given that stocks are priced by auction, we may not be at the bottom, but I don't see a scenario where the stock is worth less than it is today if management is willing to break up or sell the company. If there really is a sales pipeline and we start seeing substantial increases in revenue in Q3 and Q4, then Q2 will seem like just a glitch and I'll be using Hansen in the future as an example of how short-sighted investors can be. And kicking myself for not buying more.

Hansen had a cash balance of $29.4 million at the end of Q2. If they don't ramp sales quickly they are either going to have to dilute the stock or borrow more money, neither of which is a pretty scenario.

Hansen Medical is not a stock for conservative investors. It has astonishing potential, long term, but it is also a long way from financing itself through profits. It should only be bought by investors who know how to manage risk.

Disclaimer: I am long HNSN. I will not trade in the stock for 1 week following this post. I have no position in ISRG or STJ.